Inequality, Leverage and Crises: The Case of Endogenous Default

By Michael Kumhof, Romain Ranciere, Pablo Winant

December 17, 2013

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Format: Chicago

Michael Kumhof, Romain Ranciere, and Pablo Winant. Inequality, Leverage and Crises: The Case of Endogenous Default, (USA: International Monetary Fund, 2013) accessed September 20, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

The paper studies how high household leverage and crises can arise as a result of changes in the income distribution. Empirically, the periods 1920-1929 and 1983-2008 both exhibited a large increase in the income share of high-income households, a large increase in debt leverage of the remainder, and an eventual financial and real crisis. The paper presents a theoretical model where higher leverage and crises arise endogenously in response to a growing income share of high-income households. The model matches the profiles of the income distribution, the debt-to-income ratio and crisis risk for the three decades prior to the Great Recession.

Subject: Consumption, Income distribution, Income inequality, Income shocks, National accounts, Personal income

Keywords: Consumption, Crisis probability, Debt leverage, Debt-to-income ratio, Financial crises, Global, Global solution methods, Gross income, Hypothesis model, Income distribution, Income inequality, Income share, Income shocks, Installment debt, Personal income, Utility function, Wealth in utility, Wealth inequality, WP

Publication Details

Pages:

48
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2013/249
Stock No:

WPIEA2013249
ISBN:

9781484310762
ISSN:

1018-5941

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